Debt Sustainability, Non-Concessional Borrowing and the World Bank’s Anti-Free

Riding Policy

Organsation of presentation

Presentation is organised into 3 Sections:

1. A Review of Non-Concessional Borrowing by and Debt Situation of LICS

2. A Review of the World Bank’s Recent Proposed Policy on Anti-Free Riding

3. Recommendations

1. A Review of Non-Concessional Borrowing by and Debt Situation of LICS

1.1 A review of the profiles and stylized facts on non-concessional borrowing in LICs

• Our review (See Pargraphs 5 to 14 of the paper) shows that natural resource rich countries and countries in conflicts (that are therefore in arrears with BWIs) account for the bulk of non-concessional debt stock and flows, particularly public and publicly guaranteed types.

• But it would not be illogical to anticipate that post-MDRI countries too could soon start (or might have just started) contracting non-concessional debts in sizeable amounts.

• We also highlight the geographical concentration of bilateral external credits that characterises many countries, with outstanding credits from emerging creditors like China, Kuwait and Saudi Arabia accounting for high percentage of GDP of the borrowing countries. We point out that this could make the borrowers more vulnerable.

• In addition, we review (See Paragraphs 15 to 23 of the paper) the available descriptive and “qualitative” information about the activities of emerging creditors in LICs, with emphasis on the lending activities of China in Africa.

1.2 A review of the likely reasons that could have made the countries resort to non-concessional borrowing.

• We identify a number of supply factors at the creditors’ end and demand factors in the borrowing LICs (See Paragraphs 24 to 33 of the text).

1.3 Prospects and Possible Problems with Non-Concessional Borrowing by LICs

• We identify (See Paragraphs 34 to 39 of the text) a number of possible prospects and disadvantages associated with non-concessional borrowing by LICs. We similarly discuss (See Paragraphs 40 to 47 of the text) possible dangers and disadvantages in doing.

• A conclusion from these is that the circumstances of each country would determine which of the prospects and problems would apply and to what extent.

2. A Review of the World Bank’s Recent Proposed Policy on Anti-Free Riding

• The World Bank staff recently produced, in June 2006, a policy document recommending series of measures to its Board in preventing what it refers to as “Free riding”. The latter and larger part of our paper is devoted to a review of the policy document.

2.1 Summary of the Contents of the Policy Document

• We summarise (in paragraphs 48 to 55 of the text) the main contents of the document, including the peculiar concept of free riding adopted and the concessionality benchmark to be used.

• We also summarise (See paragraphs 56 to 68 of the text) the proposed responses, including the use of DSF as the coordinating tool for the creditors as well as discouraging of borrowers being complicit in free riding through a combination of cuts in volume of IDA assistance and hardening of terms of IDA credits.

2.2 Prospects and Benefits of Implementing the Policy

These (as discussed in Paragraphs 71 to 77 of the paper) include the following:

• Reduction of the incidence of opportunistic creditors financing low-return projects.

• Guarding against moral hazard problem of reckless borrowing by LICs with a view to becoming (or continuing being) eligible for IDA grants.

• Strengthening, through the use of DSF, of bargaining position of LICs in contracting foreign loans.

• Discouragement of LICs from embarking on large borrowing until they have put in place adequate debt management capacity and governance institutions.

2.3 Possible Problems and Disadvantages of the Proposed Policy

• These (as discussed in Paragraphs 78 to 93 of the paper) include the following:

• The philosophy or fundamental objective, which seem to have prompted the World Bank proposal, that is routed in inappropriate perception by the World Bank of its role as a competitor with other creditors in provision of resources to LICs.

• Similarly inappropriate sentiment that it is evil for it to cross-subsidise private investors, particularly emerging creditors, irrespective of the consequences on the LICs.

• Discrimination against LICs by IDA in allocating its resources is identified as a part of the problem that drives LICs to contract non-concessional loans and the proposed policy document has nothing to offer in addressing this issue.

• The policy would also hinder attainment of MDGs (or financing of growth-promoting infrastructural and other large expenditure projects) by the LICs by discouraging them from borrowing, just as the penalty of further reducing IDA grant allocation to them can make them resort further to non-concessional borrowing.

• The implied increased financial oversight of, and intrusion in, the affairs of government by the World Bank in implementing the policy would also erode sovereignty of the countries, just as it would run counter to the much acclaimed principles of ownership and alignment that are a part of the Paris Declaration on Aid Effectiveness.

• The acceptance and legitimacy, in the eyes of LICs and creditor community, of DSF, on which the whole policy rests, are also in doubt.

• Besides, the proposed policy glosses over all other fundamentals that affect debt sustainability and focuses on only volume of loans.

• In addition, it is one sided and asymmetrical by penalising only borrowing LICs for breaching the concessionality guidelines while leaving the creditors untouched.

• Finally, the policy may not be easy to enforce as LICs that breach the guidelines could easily hide this fact from IDA while, for many of them, even the maximum penalty (viz: disengagement from the “offending” country) at the disposal of IDA may be insufficient to deter some LICs, particularly resource rich countries.

3. Recommendations

3.1 Recommendations to Policy Makers in LICs (as fully discussed in Paragraphs 95 to 100 of the text)

• Policy makers should refrain from reckless and injudicious borrowing.

• They should strengthen debt management capacity as well as the legal framework for managing of debt and broader government finances.

• They should diversify geographical sources of their foreign loans.

• They should pay attention to the exchange rate and monetary management challenges posed by inflow of foreign resources.

3.2 Recommendations to the World Bank, in particular, and International Development Partners, in General (as fully discussed in Paragraphs 95 to 101 to 106 of the paper)

• The World Bank should be at the forefront in providing and championing an initiative of a multilateral framework for promoting debt management capacity in LICs, similar to the IF and GCAP networks – that are respectively for promoting micro and small enterprises and technical assistance on trade-related matters.

• It should also do more in promoting exports in LICs.

• It should refrain from perceiving itself as a rival to other creditors in the loan market for LICs and from seeing cross-subsidisation of emerging creditors as necessarily a bad thing; liberalise or relax its conditionalities.

• It should desist from the existing discrimination against LICs in allocating IDA resources.

• It should extend the proposed policy to cover the domestic debt also.

• Finally, it should extend sanctions for breaching the concessionality guidelines in its proposal to creditors too, particularly by spearheading an adoption of international agreement whereby lending to LICs that flagrantly breach concessionality norms be treated as odious and illegitimate.

• Thank you for listening!